Insolvency: Secretary of State fees avoided on ‘payment in full’ bankruptcy annulment

16th April, 2018

In the decision in Mohammed Safier and (1) Wendy Jane Wardell & David John Standish (Joint Trustees in Bankruptcy of Mohammed Safier) (2) The Official Receiver the High Court made a potentially far-reaching decision on the payment of Secretary of State fees in certain annulment applications. Sue Austin considers the judgment.

An application for annulment was made by Mr Safier on the grounds of ‘payment in full’, payment of his creditors being financed, not from the realisation of his assets, but from funds provided by a third party. The third-party payment was prompted by the joint trustees’ (“trustees”) application for possession and sale of Mr Safier’s freehold property which had an unencumbered value of £200,000.

The annulment application itself was not contentious but the application was referred to the High Court for determination because of a dispute over whether or not the Secretary of State fees, amounting to £7,372.92, were payable on the third party funds provided to the trustees and paid into the Insolvency Services Account (“ISA”).

Third party funds of £44,624.30 were received by the trustees who, after deduction of their costs of £9,931.20, paid the balance into the ISA and requested that the monies be placed in a suspense account without Secretary of State fees being charged. This was in accordance with guidance issued to insolvency practitioners by the Insolvency Service in October 1997 (“the guidance”)

The requirement for a trustee to pay money into the ISA is laid down in the Insolvency Regulations 1994 which states “… the trustee shall pay all money received by him in the course of carrying out his functions as such… into the Insolvency Services Account…”.

The trustees’ submission was that that the function of the trustee as laid down in s.305(2) Insolvency Act 1986 is “to get in, realise and distribute the bankrupt’s estate…”, that, as the third party monies did not form part of the bankrupt’s estate, they were not received by the trustees in the course of carrying out their functions as such and, accordingly, the Secretary of State fees should not be charged.

The Official Receiver, although accepting that the third party funds did not form part of the bankrupt’s estate, submitted that they were received by the trustees in the course of carrying out their functions as such because, had they not been provided to the trustees, the trustees would have realised assets within the bankrupt’s estate to meet the debts and expenses of the bankrupt. The Official Receiver acknowledged that, as a matter of practice, the Insolvency Service had previously agreed that the Secretary of State fees would not be charged in ‘no asset’ cases where third-party funds had been paid into the ISA to discharge the debts. This was because such funds would provide a bankruptcy estate with a benefit it would not otherwise have got. However, the Official Receiver submitted that, where third-party funds provide no additional benefit to the estate, the Secretary of State fees should still be payable.

His Honour Judge Behrens agreed with the trustees’ submissions that the receipt of third-party funds is not part of the trustee’s function and the moneys are not payable into the ISA. It follows that no fee is payable in respect of them. He also discounted a submission by the Official Receiver that, as the moneys had been paid into the ISA the Secretary of State fees were payable and stated:

“In my view the Fee is only payable on sums properly payable into the ISA”. The bankruptcy order was annulled and the petition dismissed. the Fee is only payable on sums properly payable into the ISA”.

The bankruptcy order was annulled and the petition dismissed.

This decision is of most relevance to bankruptcies in respect of which the petition was presented before 21 July 2016, on which date the previous fee regime was abolished by the Insolvency Proceedings (Fees) Order 2016. However, His Honour Judge Behrens made the point that under the new fee regime, some fees appear to be payable from ‘chargeable receipts’ paid into the ISA while some are payable without reference to chargeable receipts and stated that:

“the questions arising, in this case, will accordingly continue to have wider relevance”.

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